Audits Fuel Debate on Curbing California Power Shortage

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The New York Times

When California’s Public Utilities Commission called for independent audits of the state’s two largest utilities last month, the results were supposed to determine whether the utilities were justified in asking for rate increases of up to 30 percent to rescue them from what they described as the brink of bankruptcy.

When legislators and consumer groups consider the results of the audit of Pacific Gas and Electric, the utility serving Northern and Central California and a subsidiary of the PG&E Corporation, released late today, they will certainly have more to discuss.

Many observers, including Wall Street analysts, said the 150-page audit of Southern California Edison that was released on Monday did little more than restate the obvious: that utility, too, is running out of cash and cannot borrow more. Policy makers, the company and consumer activists put their own spins on the information, but they agree on one thing: the audit shows that the parent company was able to take advantage of the billions it received from the utility and apply it to its other businesses as well as distribute it to stockholders.

“I feel like how the politicians react to that is much more important than what the audit said,” Steven Fleishman, a utilities analyst at Merrill Lynch, said of the Southern California Edison audit. “If they say the company took the money for its own gain, that will slow down the negotiating process. If not, things will move ahead.”

A spokesman for Gov. Gray Davis said the audit supported the governor’s contention that Southern California Edison did not need higher rates. Southern California Edison officials said the audit, by the major accounting firm KPMG L.L.P., confirmed their claims of corporate destitution and the need for higher rates. And some consumer groups and legislative officials accused Edison International of raiding the utility’s coffers with little thought of California’s needs.

Today, the California Senate debated legislation that would allow the state to buy electricity to help the state’s two largest utilities stave off bankruptcy.

Interpretations aside, the audit offers some insight into how Edison International spent the $4.8 billion it got from Southern California Edison in the five years since the state’s electricity industry was deregulated. For the most part, that money benefited buyers of Edison International stock: about $1.6 billion went to pay dividends, the audit reported, and $2.7 billion was used to repurchase stock, a step that generally buoys share prices.

Pacific Gas and Electric, like Southern California Edison, also sent billions of dollars to its parent company that benefited other subsidiaries and stockholders, according to a separate audit of recent financial status. Of the $4 billion that the PG&E Corporation received from the utility from 1997 through 1999, $2.7 billion was spent on the repurchase of the company’s shares and $1.5 billion on dividends. The auditor, the energy consulting firm Barrington-Wellesley Group, also suggests that the amount PG&E failed to collect because of the higher pricer from producers was $5.2 billion.

But unlike the analysis of Southern California Edison, the auditors took liberties to explain in depth how Pacific Gas and Electric could improve its cash position. According to the audit, Pacific Gas and Electric did not develop a cash conservation program until December, despite potential problems that were predicted 18 months ago, the audit said. Executives had anticipated last June that those problems would reduce earnings, the auditors said.

The audit said that while the utility identified a hiring freeze as a way to save money it did not take steps to cut the salaries of managers.

“Reductions or deferral of some employee or management compensation could amount to substantial cash conservation,” the audit said.

It also suggested the company could save $1.2 million a year by eliminating the 25 percent discount it offers employees on gas and electric bills.

Calls seeking comment from a PG&E executive were not returned.

Critics of the utilities ask why their executives, despite warning state officials of potential electricity shortages as early as last May, did not set aside cash reserves in anticipation of spikes in the prices of wholesale energy. Leaders of consumer groups said the utilities’ holding company structures — created as the power business was deregulated in the state — might have blinded the parent companies to the utilities’ financial needs.

“Did the holding company adequately fund the utilities, or did they shelter the money to the detriment of the utility and its ability to function?” asked Michael Shames, executive director of the Utility Consumers’ Action Network in San Diego. He said the question needed to be answered before a rate increase was granted. “What is not known is if the utilities would have behaved the same way if they had not changed their corporate structure.”

Southern California Edison generates far more money for Edison International than any of the parent company’s other units, which build and operate power plants around the world as well as supply electricity to customers in Southern California. The $4.8 billion that the utility contributed to the parent company came from several sources, a spokesman said yesterday: $600 million from the sale of its power plants, $1.2 billion from the sale of rate reduction bonds and $2.6 billion from the utility’s operations, such as running its own hydroelectric power plants.

But one reason Southern California Edison executives did not save money to finance these most recent price spikes was that they made assumptions that had not come to pass, said Tom Higgins, a vice president. After last summer’s price increases, utility executives expected that the Federal Energy Regulatory Commission would rein in power generators, Mr. Higgins said. Executives believed, too, that the Public Utilities Commission would allow them to pass higher rates on to consumers because the company had said it met its obligations under deregulation. Besides, Mr. Higgins added, investors would not buy shares in the company if the money was being spent to subsidize ratepayers, not to invest in revenue-generating businesses.

“We would not ask shareholders to subsidize the consumption of electricity,” Mr. Higgins said today in an interview. “There is no way we would have built that into the reserves even if we wanted to.”

That has drawn the ire of consumer advocates who say the way the company is structured only serves to protect shareholders, not ratepayers as initially billed. “They are using it as a shield now,” said Harvey Rosenfield, director of the Foundation for Taxpayer and Consumer Rights in Santa Monica.

The commission is meeting this week to discuss rate increases.

Consumer Watchdog
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